1990 (4) TMI 111 - AT - Income Tax

Summary

Issues Involved:
1. Whether the transfer of building and machinery by the assessee firm to M/s. DRJ Brothers constitutes a sale under the Income-tax Act.
2. Whether depreciation allowed on the building and machinery should be withdrawn.
3. Whether the computation of deemed profit under section 41(2) of the Income-tax Act is justified.

Issue-wise Detailed Analysis:

1. Whether the transfer of building and machinery by the assessee firm to M/s. DRJ Brothers constitutes a sale under the Income-tax Act.
The primary issue was whether the transfer of assets by the assessee firm to M/s. DRJ Brothers, which had common partners, constituted a sale. The assessee argued that the transfer did not amount to a sale within the meaning of the Sale of Goods Act and hence did not attract the provisions of section 41(2) of the Income-tax Act. The Income-tax Officer disagreed, holding that the transfer did occur and thus depreciation allowed on those assets was not admissible. The Tribunal referred to the Supreme Court decision in CIT v. B.M. Kharwar, which held that a firm could sell its assets to a company, and such a sale would attract tax on deemed profits under section 41(2). The Tribunal concluded that the transfer of machinery by the assessee firm to M/s. DRJ Brothers did constitute a sale, following the Madras High Court decision in CIT v. Bharani Pictures, which applied a similar principle to a partnership firm.

2. Whether depreciation allowed on the building and machinery should be withdrawn.
The Income-tax Officer had withdrawn the depreciation of Rs. 3,991 allowed on the building and machinery, arguing that the assets were sold on 31-3-1979. The Tribunal upheld this decision for the machinery, stating that the sale was valid and thus the depreciation initially granted was not admissible. However, for the building, the Tribunal found that the transfer was not effective without a registered document, as required for immovable property. Citing the Madras High Court decision in CIT v. Dadha & Co., the Tribunal held that mere book entries could not effectuate the transfer of the building. Therefore, the depreciation on the building was correctly allowed to the assessee firm.

3. Whether the computation of deemed profit under section 41(2) of the Income-tax Act is justified.
The Income-tax Officer had added Rs. 7,303 as deemed profit under section 41(2) of the Income-tax Act, which was contested by the assessee. The Appellate Assistant Commissioner had deleted this addition, relying on the Madras High Court decision in Abdul Khader Motor & Lorry Service's case, which held that there was no sale and thus section 41(2) was not applicable. The Tribunal, however, found that the sale of machinery did occur, and thus the computation of deemed profit under section 41(2) was justified. For the building, since the transfer was not effective, the computation of deemed profit under section 41(2) was not justified.

Conclusion:
The Tribunal partly allowed the appeal of the department, holding that the transfer of machinery constituted a sale and justified the withdrawal of depreciation and computation of deemed profit under section 41(2). However, the transfer of the building was not effective without a registered document, and thus the depreciation allowed on the building was not erroneous, and the computation of deemed profit under section 41(2) for the building was not justified.